Testimony may pose ‘real difficulties' for MFS Pacific claim

April 3 (BusinessDesk) - Testimony by former
MFS Pacific Finance chief financial officer Nigel Lane could
frustrate a bid by the failed lender’s receiver to sue
auditor Sherwin, Chan & Walshe, though not before the case
reaches a formal hearing.

Justice Robert Dobson dismissed
Sherwin, Chan & Walshe’s application for a partial strike
out of the receiver’s claim that the auditor breached its
obligations in relation to the lender’s 2007 financial
statements, according to a March 12 judgment in the High
Court in Wellington. Still, Justice Dobson said Lane’s
“evidence may well create some real difficulties for the
plaintiff’s claims” if it isn’t discounted after
cross-examination.

The former executive for MFS, now
known as OPI Pacific Finance, disputed the events as
advanced by receiver Colin McLoy of PwC, claiming “the
company’s directors were well aware of the extent of
non-performing loans in the company’s loan book, and their
deterioration over time,” the judgment said.

“Mr Lane
described MFS Pacific as being ‘… increasingly utilised
as a depositary for non-performing loans from another fund
under the MFS umbrella …’,” the judge said.

Lane
considered the directors’ view on whether to exercise a
put option, where the Australian parent Octaviar would pay
the face value of loans in arrears for more than three
months, “were conflicted by their position as either
executives and/or directors of Octaviar or other entities
linked with the parent.”

Even if the auditor had sought
a different accounting treatment for the loans and the
impact of the put option, “this would not have altered the
course of conduct pursued by the directors,” the judgment
said.

The receiver claims that if the audit had been
completed competently, the lender would have stopped trading
earlier, which would have prompted directors to exercise a
put option requiring Octaviar to pay MFS the $61.6 million
face value of loans in arrears rather than the $23.1 million
payment made under the option.

Sherwin, Chan & Walshe
sought to strike out the application, saying “there is no
tenable basis on which the plaintiff could make out that any
of the errors or omissions alleged against SCW could have
been causative of certain components of the losses that have
been claimed,” the judgment said.

The auditor pursued
the partial strike out on the basis the finance company’s
directors’ extension of a prospectus in December 2007
overtook the audited financial statements several months
earlier.

In seeking to strike out the put option claim,
counsel for Sherwin, Chan & Walshe said the majority of the
MFS directors were either executives or directors of
Octaviar, and inferred there was a conflict of interest, the
judgment said.

On both counts, the receiver’s counsel
argued that until the evidence was tested at trial it
couldn’t be discounted as untenable.

“I cannot be
satisfied that there is no tenable prospect for MFS Pacific
to make out a sufficient causative link between any alleged
negligence in the auditors’ approval of the treatment of
the valuation of loans, and the deferral of a decision to
exercise the put option in relation to the major loans that
were then in arrears,” Justice Dobson said.

“The
argument has identified difficulties for this part of the
plaintiff’s claim, but none of them can be determined in
the context of a strike out application as existing to the
level that renders the pleaded causative link to be
untenable,” he said.

The decision was recently
published on the Justice Ministry’s website.

Last
November, the Financial Markets Authority charged former OPI
Pacific directors Mark Lacy, Jason Maywald, David Anderson
and Craig White under the Securities Act with making untrue
statements in the 2007 offer document. They appeared in
December and are scheduled to appear in the Auckland
District Court next month.

OPI Pacific went into
receivership in September 2009 after a 16-month moratorium
and was put into liquidation in November 2011. At the time
of the receivership it owed almost 11,000 investors about
$256 million, of which 3.25 cents in the dollar has been
repaid, on top of the 22.2 cents investors received during
the moratorium.

The Wellington-based BusinessDesk team led by former Bloomberg Asian top editor Jonathan Underhill and Qantas Award-winning journalist and commentator Pattrick Smellie provides a daily news feed for a serious business audience.

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